Cryptocurrency and tax!

Cryptocurrency and tax!

Trading in the cryptocurrency market has been quite lucrative for some early adapters. You might think your dabbling in this market is simply a hobby, a few small trades, a couple of lucky airdrops, and nothing more. However, if you’ve made a gain, a loss, or broke even you may have to disclose that trade, in your tax return. That’s right, cryptocurrency is taxed! So, let’s tax a look at Cryptocurrency and tax!

It may seem a little confusing after all, your cash and bank transactions aren’t taxed. But in Australia, in fact in many nations around the world, cryptocurrency is treated as property. So, your trades, airdrop windfalls, cashing out, swapping out, staking, gifting, are all property transactions. Even that lost private key preventing you from ever accessing your cryptocurrency again may trigger a taxable event. In Australia, the sale of property at a profit is a capital gain and the sale of property at a loss is a capital loss. These capital gains and losses are usually included in your tax return.

To help you understand cryptocurrency and tax, we have included a few examples of the common transactions and events that you will encounter when trading in cryptocurrency.

First the Exception

Australian tax law is complex and even though the general rule is your cryptocurrency is taxable, there is an exception for personal use. But be careful if you have trading regularly, buying with the intention of making a profit, or holding some digital currency as a long term investment, then you own taxable property. However, if you are simply buying some digital currency to buy your morning coffee, fill your wallet for fun over the weekend, or to pay for that share ride, then your holding might be a personal use asset and exempt from tax. But you must have acquired no more than $10,000 in personal use assets for the capital gain to be disregarded.

Example: Personal Use Asset

Samantha buys $100 of cryptocurrency each fortnight to pay for her fortnight online gym membership fees. She doesn’t hold any other cryptocurrency in her name. During this last fortnight Samantha saw a yoga mat online she wants for her home gym. But the store doesn’t take cryptocurrency so she uses an online payment gateway to buy the game.

In total Samantha’s cryptocurrency has cost her less than $10,000. She is using the cryptocurrency for personal purposes, so her holdings will be considered personal use assets and she doesn’t have to record any gain or loss in her tax return.

The longer you hold the cryptocurrency the less likely the ATO will treat the holding as a personal use asset.

Example: Not a Personal Use Asset

Miranda buys $100 of cryptocurrency each fortnight to build up her holdings. She expects to sell in six months’ time and is watching the market, so she can sell at a favourable exchange rate. Six months later she sells and makes a tidy profit. Miranda has been waiting to go on a holiday and she uses the money to pay for an island escape. Even though Miranda cashed out her holding for personal use, she had an intention to make a gain. It is unlikely, the ATO will view the cryptocurrency as a personal use asset.

Now for the Tax

Capital gains tax rules apply when you dispose of your cryptocurrency. A disposal can occur when you:

• sell your cryptocurrency
• trade or exchange your cryptocurrency for another cryptocurrency
• convert cryptocurrency to fiat currency
• gift your cryptocurrency, or
• use your cryptocurrency to obtain goods or services.

If you are storing your cryptocurrencies in a digital wallet, each cryptocurrency is a separate CGT asset.

Exchanging cryptocurrency for another cryptocurrency

Remember that cryptocurrency is deemed a property as is taxed under the capital gains tax rules. Trading or exchanging one cryptocurrency for another cryptocurrency, is treated as a disposal of property and the purchase of another property. The gain or loss on the trade is calculated at the market value of the purchase and sale. It also needs to be calculated in Australian dollars. 

Example: Exchanging cryptocurrency for another cryptocurrency

Carrie bought 100 Crypto A on 5 January 2022, for $10,000. On 15 May 2022, Carrie goes online to her usual trading exchange platform and exchanges 20 Crypto A for 100 Crypto B.

She notes that the exchange platform recorded the transaction at $5,000. Carrie’s capital gain for the sale of her 20 Crypto A will be $4,000.

Proceeds on disposal                     $6,000

Cost base of 20 Crypto A               $2,000 ($10,000/100 x 20)                                                                          

Capital Gain                                        $4,000

If Carrie held the Crypto A for more than 12 months prior to the exchange then she you be entitled to a 50% discount on the capital gain and only taxed on $2,000.

Staking rewards, airdrops, and forks

You may receive rewards of new tokens by forging (similar to mining), proxy-staking, or simply as an airdrop. New tokens are taxed as ordinary income at the market value of the tokens received.

Example: Cryptocurrency Airdrops

AirMint is offering an airdrop token for all current holders of 10,000 AIR cryptocurrency. The airdrop is offered at 1AIR for each 1,000 AIR.

On 01 February 2022 the AIR currency is worth $10. Samantha owns 10,000 AIR and received 10AIR. The market value of the 10 AIR received is $100. Samantha must include te $100 in her next income tax return.

Gifting Cryptocurrency

Buying cryptocurrency and gifting it to you friends, family or a charity is treated as a disposal and is a capital gains tax event for the person gifting their holding. Whether you make a capital gain or a capital loss the amount is recorded in your tax return.

The person who receives the cryptocurrency does not pay tax when they receive the gift. But they do need to record the date and market value of the gift at the time it is received.

Example: Gifting Cryptocurrency

Mr Big wants to surprise Carrie and buys her 3 BTC for her birthday. The BTC have a market value of $55,000 per BTC at the time Mr Big transfers the coin to Carrie.

Mr Big bought BTC when the first hit the market and has made a significant capital gain. He will include the gain in his tax return and pay tax on the capital gain. 

Carrie does not record the gift in her tax return. However, 6 months later Carrie decides to sell 1 BTC for a down payment on a new investment property. When Carrie sells the BTC have a market value of $58,000. Carrie makes a capital gain of $3,000 on the disposal of the 1 BTC and will include the capital gain in her tax return.

Loss or theft of cryptocurrency

Have you lost your private key? This is a problem, as a private key can never replaced. If you lose your private key or your cryptocurrency is hacked and stolen, you may be able to claim a capital loss in your tax return. Note a capital loss can only be offset against a capital gain. You will need records to show the ATO that you actually owned the cryptocurrency. The following evidence and records should suffice:

• the date you acquired the private key
• the date you lost the private key
• the wallet address that the private key relates to
• the cost you incurred to acquire the lost or stolen cryptocurrency
• the amount of cryptocurrency in the wallet at the time you lost the private key
• the cryptocurrencies in your wallet at the time you lost the private key
• the transactions linked to your personal identity showing that you control the wallet
• that you are in possession of the hardware that stores the wallet
• the transactions from a verified account on a digital exchange platform to the wallet

Record Keeping

Anyone dealing with cryptocurrency needs to keep the following records:

• The date of each transaction
• The amount in Australian dollars at the time of the transaction
• Details of the transaction,  
• Any associated expenses, like fees and commissions, and
• Details of the other party
• receipts of purchase or transfer of cryptocurrency
• exchange records
• records of agent, accountant and legal costs
• digital wallet records and keys
• software costs related to managing your tax affairs

You will still need these records, even if you believe your holding should be an exempt personal use asset. You will need to prove to the ATO that you used your cryptocurrency for personal use.

So, whether you are an early adapter who started buying cryptocurrency back in 2009 or you are new to digital currency and exploring your investment options you need to expand your knowledge horizon so you can understand how your cryptocurrency will be taxed.

Your NFT tax event will typically be coupled with a cryptocurrency event. to find out how your NFTs are taxed, see our companion article: NFTS and Tax. If you would like to find our more about NFTs, we recommend you read this article by Danielle Marie: Investing in NFTs. and Tax.

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Jacqueline Hodges is a Chartered Accountant, Registered Tax Agent and SMSF Auditor. She is a Financial Adviser and an authorised representative of Wealth Today. She has a wealth of experience having worked in the financial services sector for most of her career. Jacqueline is a firm believer in continuing education and holds a Bachelor of Commerce (UQ), a Master of Taxation (UM), and a Financial Planning Certificate.  She established her own accounting firm servicing individuals and small businesses in 2005 and complemented the business in 2015 with the opening of the financial advice division.

Disclaimer: The information contained in this article is general in nature and may not be relevant to your personal circumstance and needs. Taxation, legal and other matters referred to in this article are of a general nature only and are based on laws existing at the time and should not be relied upon in place of appropriate professional advice. The examples provided do not cover all cryptocurrency events.

We recommend that you assess whether the information is appropriate to your needs and if appropriate speak with a financial adviser to discuss your needs, financial situation and investment objectives.

 HQ Wealth Pty Ltd as trustee for HQ Wealth (CAR 1238791) and Jacqueline Hodges (AR 1238790) are Authorised Representatives of Wealth Today Pty Ltd (ABN 62 133 393 263), AFSL 340289.

Jacqueline Hodges, 10 Ellen Media

This article is republished from WFO. Read the original article.